Taiwan's Tatung Corp. saw the handwriting on the wall a few years ago. Building PCs and peripherals for companies such as IBM and Toshiba to sell under their brand names was a losing proposition: Most of the profits went to the guy whose name was on the box--not to the guy who built it.
Tatung, the country's No. 1 computer maker, wasn't alone. By the late 1980s, most of Taiwan's leading computer makers had concluded that the only way to really make money--and achieve prominence in world computer markets--was to build their own PCs, workstations, and notebook computers, and sell them in the West under their own brand names.
That most Americans have never heard of Tatung--or Mitac International or First International or TECO Information Systems--proves how poor the results have been. Grossly underestimating what it would take to establish brand names in the crowded U.S. market, Taiwan's computer makers have been pushed back into their behind-the-scenes role. And because of severe price cutting among their customers, many are finding it difficult merely to survive at the old game.
Even Acer Inc., the Taiwanese computer maker with the highest profile in the U.S., has grabbed less than 1% of the American market and recently reported a $30 million loss from U.S. operations. "Taiwanese PCs have had zero impact in the U.S. as far as name brands go," says Andy Bose, vice-president of market researcher Link Resources Corp. in New York.
Acer says it has no intention of giving up its ambitions for the U.S.--and the world--and has earmarked $20 million to promote its name this year (box). But Taiwan's other clone makers are rethinking their strategies and wondering if they'll ever make it in the U.S. under their own names.
What went wrong? Chalk it up to naivete. Five years ago, when the world personal-computer market was booming, cloners such as Acer, Mitac, and Tatung were racking up healthy profits and were in an expansive mood. They no longer wanted to be seen simply as clever ripoff artists--despite a widespread industry in counterfeit software that is still thriving. So they started snapping up U.S. distributors and Silicon Valley design firms. Back home, they joined government-sponsored research projects. Led by Chinese-American veterans of such behemoths as IBM, Xerox, Wang, and AT&T, young engineers set out to develop more sophisticated computers.
One consortium began designing workstations based on Sun Microsystems Inc.'s Sparc microchip. But it broke up after Intel Corp. and Microsoft Corp.--suppliers of key technology to PC clone makers--persuaded companies such as Acer to back off. Some Taiwanese companies went on to build workstations, but sales have been slow. Another group collaborated on a notebook PC, but the process was so slow that by the time it was ready for manufacturing, the design was outdated. The bottom line, says Bill Higgs, an analyst at market researcher InfoCorp: "Taiwan is still known as a technology follower rather than a technology leader."
ROCK BOTTOM. So most of the Taiwanese PC makers are scrambling back to the private-label business they had hoped to escape. The good news: There's plenty of business. Shipments of PCs from Taiwan are expected to jump 17% this year, to 2.9 million units (chart). And more than ever, they're built under private-label deals. Last year, nearly 49% of the 2.5 million computers Taiwan exported were built under contract to foreigners, compared with 33% in 1990, according to Taiwan's Institute for Information Industry.
"I no longer believe brand names will be so important," says Mitac President Ho Ching-shiung. Mitac, which has had moderate success selling its own brand in Europe, got nowhere in the U.S. Now, it's concentrating on new notebooks, PCs, and pen-based products that others will sell. Similarly, Tatung is happy to return to the private-label business. Its workstation and notebook PC lines dragged down earnings in 1990. But it's now bouncing back with a $600 million order from Packard Bell Electronics Inc. for 700,000 PCs and 500,000 color monitors.
With prices dropping as much as 40% annually, U.S. and Japanese manufacturers are turning to Taiwanese subcontractors, who are willing to live on 10% gross margins. That's why, overnight, Taiwan has become a leading supplier of notebook computers. In 1991, a year after shipping their first notebooks, Taiwanese manufacturers were providing 40% of the world's output. Companies such as Tandy, Dell Computer, and NEC now have notebook PCs built in Taiwan.
The bad news: Despite all the orders, prices are still dropping, and profits in Taiwan are precariously slim. Even notebook producers, whose factories are running flat out, are suffering. "Our prices can't drop any further," says President Charles Chen of Twinhead, which makes 100,000 notebooks a year. "We've already hit bottom."
FALLING LIKE FLIES. Industry executives are understandably anxious about the future. While only about 10% of the cost of building a PC is direct labor, workers in Taiwan have won 40% wage increases in the last three years. With customers demanding ever lower prices, the inevitable shakeout has begun: The Taipei Computer Assn.--which consists of 4,500 companies, including makers of monitors, circuit boards, and other components--says it is losing about 50 members a month to bankruptcy. By yearend, Mitac's Ho predicts, the number of serious PC makers will shrink from a peak of 400 in 1991 to a few dozen.
Now, some companies are giving up their PC dreams altogether, or at least postponing them. Rather than build complete machines, many are focusing on building peripherals and components. First International Corp., for example, is concentrating on motherboards, the main circuit boards used in PCs. And TECO Information Systems, which has been stymied in its attempts to sell PCs, says it will simply stick with monitors for a while longer. "Right now, we're groping in the dark," concedes Herman Shu Jr., vice-president for marketing and research and development. "We just want to get through the year."
His hope--one that is shared by many Taiwanese computer executives--is to survive the shakeout. If they can, in a few years, they'll try for the big time again.